Optimum Financial in Elizabeth offers advise on Maximizing benefits in a solo 401(k)

For years, small business owners had few retirement plan options. But as tax law benefits have increased and administrative costs have decreased, more entrepreneurs are using the popular 401(k) plan as a retirement savings vehicle.

In the past, 401(k) plans were typically offered by larger corporations. Employees could make pre-tax contributions by payroll deduction. The company would then usually match a percentage of those contributions. Investments grew tax-free until withdrawn at retirement. One advantage of a 401(k) plan is the relatively large amount you can contribute each year – $17,000 in 2012 with an extra $5,500 catch-up if you’re 50 years old or older.

Now you can establish the same type of plan if you’re self-employed or run an “owner only” business. That’s a business with just you and possibly your spouse, but no employees. You can save more with a solo 401(k) than with the traditional SEP, SIMPLE, or Keogh plans. That’s because you are able to make two types of tax-deductible contributions. First you make the usual employer contribution as owner of the business.

Then you can make an additional salary deferral as an employee. As a result, you could potentially shelter up to $50,000 of your 2012 self-employment earnings from tax. If you’re eligible for the over-50 catch-up, that rises to $55,500.

Of course, if your company employs other full-time employees, they must be covered by the plan.

The solo 401(k) plans are flexible and comparatively easy to administer. If you think this plan might be right for you, please contact our office. We can tell you more about it and help show you how much you could save.